Starting Rate for Savings and Tax Coding Adjustment

My wife has just had her tax coding for this year reduced from £12570 to £11070 because she will have an estimated untaxed savings interest of £1500 for this tax year. Her estimated State Pension income and some Pension from a Final salary scheme will be around the £12570 personal allowance limit. However she will now pay £300 extra tax this tax year. She will not actually owe HMRC any tax this tax year as this savings interest will come out of her £5000 starting rate for Savings allowance. If she contacts HMRC will they remove this tax coding reduction in these circumstances as otherwise it will be a year before this extra tax is returned after a tax calculation is performed?

@Howard Butterfield This will have happened because HMRC's estimate of her final salary pension income is less than you know it will be and based on this low estimate she has some unused Personal Allowance. And unused Personal Allowance gets used by the interest before the savings starter rate band is applied. So if she updates her expected final salary pension amount on her Personal Tax Account then this should automatically prompt a new tax code to be issued. For example if her total State and final salary pension income totals £12,500 then she will only have £70 unused allowances and the tax code deduction relating to interest will be reduced to £70 and she will be able to receive her final salary pension without tax being deducted. If her estimated pension income is £12,570 or more then there would be no need for any tax code deduction. Assuming her interest was all due to be taxed under the savings starter or savings nil rate bands. Any tax deducted since 6 April 2023 will be automatically refunded by the company paying the final salary the first time they use the new tax code.

Hi Howard,

She will need to contact our Income Tax team to ensure we hold accurate estimates for the income. The system will always try and use the Personal Allowance first if it is unused.

Income Tax: general enquiries

Thank you.